Most federal workers carry at least some life insurance under the Federal Employees Group Life Insurance (FEGLI) program, and many also have elected to purchase long-term care insurance through the Federal Long-Term Care Insurance Program. These programs serve to protect income and assets in case of death or illness. However, as you approach retirement and your debt and savings goals shift, it’s worthwhile to consider trading your life insurance policy in for a long-term care policy.
FEGLI is term life insurance. It offers pay-as-you-go protection with no accumulated cash value. Generally, the cost of insurance increases with age, although some coverage is provided free of charge after age 65. Rate tables and details about coverage are available on the Office of Personnel Management Web site at www.opm.gov in the life insurance section. Most employees, unless you waive coverage, have the Basic benefit, which is equal to basic pay rounded up to the nearest $1,000 plus an additional $2,000.
The program also has three options for additional coverage: Option A, which is equal to $10,000; Option B coverage, which equals two, three, four or five times basic pay; and, Option C, which allows you to insure your spouse and dependent children.
Federal employees, annuitants and their families also have access to long-term care insurance through the Federal Long-Term Care Insurance Program. Long-term care insurance helps pay for the cost of nonmedical care and assistance in the event that the participant becomes disabled and unable to care for himself or herself. The benefit is optional. Prospective participants must apply for coverage and be accepted to receive it. All costs are paid by the participants, and, once issued, the coverage is fully portable regardless of employment status.
The federal long-term care coverage, like FEGLI, is term insurance. You pay for each period of coverage, usually one month or pay period in advance, for protection against claims that arise during the period of coverage. If you stop paying the premiums, your coverage will lapse. You will find details and rates for the program at www.ltcfeds.com.
As you approach retirement, you must make certain decisions about your insurance needs. When reviewing your FEGLI coverage, you must consider how much you will carry into retirement and for how long. Unless you are 65 or older and have elected the maximum automatic reduction of your benefits, you must pay the premium for any FEGLI coverage you retain after separation from service. Following your 65th birthday, the maximum automatic reduction election reduces Basic and Option A coverage by 75 percent over 38 months; Option B and Option C coverage are reduced to zero over 50 months.
FEGLI is designed to fulfill a financial need that results from an unexpected death and that is unmet by other resources. The financial need usually results from a loss of income that must be replaced. During working years, life insurance is needed to replace the wages lost when a worker dies. In retirement, when savings are often a significant source of needed income, the need to make up for lost income often disappears. The death of a federal annuitant always results in a reduction of income, but this reduction does not always result in a need for life insurance. The dependent survivor can sometimes adjust spending to live within the new lower income, and sometimes the lost income can be replaced by withdrawals from savings.
Remember that life insurance is designed to be cost-effective protection in the case of an unexpected death. Carrying life insurance into old age — the time of life when you’re expected to die — is rarely a cost-effective strategy.
In my practice as a financial planner, I regularly encounter federal annuitants who carry more or less life insurance into retirement than they need. A spouse may have trouble continuing to make a large monthly mortgage payment with only a 50 or 55 percent survivor annuity income benefit. In this case, term life insurance, purchased through FEGLI or a private carrier, might be appropriate, particularly if the premiums will remain affordable throughout the life of the mortgage. Once the mortgage is paid off, the life insurance can be dropped.
In the majority of cases I’ve encountered, however, annuitants carry more life insurance than they need — often with no more rationale than that it seems like the right thing to do. An unexpected death will not significantly impair the surviving spouse’s ability to fully fund his or her retirement plan, and the insurance premiums, themselves, reduce the retirement standard of living.
At the same time, many retirees over age 50 do not have, or don’t have enough, long-term care insurance. As we age, the financial impact of death tends to shrink while the financial risk of long-term care expenses tends to grow. For most people in retirement, uninsured long-term care expenses are the largest financial threat they face.
It makes sense to consider replacing some or all of your life insurance coverage in retirement with longterm care insurance. Premiums under the federal long-term care program must be paid as long as the coverage is to remain in effect, but the premiums are established at the time of purchase and are intended, although not guaranteed, to remain level for life.
The optimal time to buy long-term care insurance is in your mid-50s, but it’s better to consider it sooner than later, since at some point you are likely to become uninsurable. Of course, the right path depends on your personal circumstances, so proceed with caution and seek competent professional help if you need it.
Written by Mike Miles
For the Federal Times
Publication July 24, 2006